Is There Finally a Winner in the Crowded Obesity Drug Market?

According to the Centers for Disease Control (CDC), more than one-third (35.7%) of all adults in the United States are obese. Obesity-related medical conditions include heart attack, stroke, type-2 diabetes and even certain types of cancer. Since 2008, medical costs associated with obesity have climbed to an estimated $147 billion dollars per year. The Federal Drug Administration(FDA) has approved drugs from two companies, and their stocks have been crushed. Is a new contender finally poised to reward shareholders?

After years of research and development (R&D), the Federal Drug Administration approved not only one but two drugs for the treatment of obesity in 2012. Arena Pharmaceuticals Inc.’s (NASDAQ: ARNA) lorcaserin, marketed as Belviq, and VIVUS Inc.’s (NASDAQ: VVUS) Qsymia. These were the first drugs approved for obesity and weight loss since 1999.

There has been speculation that the government has urged the FDA to approve obesity drugs due to the spiraling cost of obesity-related health care issues. However, since the disastrous Fenfluramine, or fen-phen, era of the mid nineties, the FDA has remained cautious. Fen-phen was a blockbuster weight-loss drug that doctors prescribed some 18 million times per month in 1996. It was later found to have caused heart valve problems in nearly one-third of the patients that used it. Subsequently, it was taken off the market and lawsuits remain to this day.

Analysts at Prop Think believe that a new weight-loss drug from Orexigen Therapeutics Inc. (NASDAQ: OREX) called Contrave might give them the upper hand over their rivals. Qsymia has had a very slow start, and Belviq has yet to launch. Investors in both stocks have been destroyed after big run ups. Arena closed yesterday at $9.25, down from a June high of $13.50. VIVUS has fared even worse, closing yesterday at $13.08, down from a July high of $31.21.

So why the hope for Contrave versus the other two drugs? All weight-loss drugs come with restrictions from the FDA. The patient must have a body mass index (BMI) over 30, the patient must have some complications as a result of obesity like high blood pressure, but most of all the FDA is concerned about heart-related issues. The fen-phen debacle has kept that in the forefront.

The excitement about Contrave is twofold. Both Qsymia and Belviq are controlled substances. Contrave is made up of two substances, Naltrexone SR and Bupropion SR, both of which have been on the market separately for many years. Neither compound is a controlled substance. It is thought that, when approved, most physicians will lean to the product that has the least risk of abuse and addiction. Plus patients can easily have their prescriptions refilled.

Most importantly, it is thought that the results from the Light Study, a cardiovascular outcome trial that is required by the FDA for approval, will be very positive. It is also possible that Orexigen may announce at their analyst day today a “rolling new drug application” (NDA) submission. This would allow them to submit components of their application prior to study being completed.

Lastly, Orexigen has a solid North American partner in Takeda Pharmaceutical. It is possible that Takeda may commit up to as many as 1,000 sales reps to market the launch and sales of the product if approved — the competitors both have 200 or less. With more than $100 million of cash on the balance sheet, a dilutive stock offering does not seem to be a concern. Orexigen is trading at $5.27 today, giving it a market cap of $441 million. A trade up to $10 a share would still leave Orexigen trading at a level far below its competitors. Arena’s market cap is more than $2 billion and VIVUS’s $1.32 billion.